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ECB fears US stock market threat to euro

THE greatest threat to euro-zone growth and price stability comes not from Japan or South East Asia but from a ‘correction’ in US stock prices, according to a member of the European Central Bank’s governing council.

Dutch national bank governor Nout Wellink’s warning came as the Dow Jones Industrial Average surged over 10,000 for the first time, and speculation intensified about the next move in euro-zone interest rates before the ECB’s decision-making body meets again on 8 April.

“As the stock market rises in the US, you are also seeing a substantial decline in household savings; people are spending more out of current income than they can afford,” he told European Voice. “If something triggered a substantial correction, it is quite clear that they would have to raise their savings.”

This would reduce consumption and consequently the output of goods and services. “The US economy is huge,” said Wellink. “This would undoubtedly have a substantial impact on Europe.”

However, he does not believe that euro-zone interest rates are too high given the external risks and the fragility of the German economy, which accounts for 35% of euroland gross domestic product.

Wellink accuses former German Finance Minister Oskar Lafontaine of confusing the monetary policy interests of his own economy with those of the rest of the single currency bloc when he repeatedly called on the ECB to cut interest rates.

Many market participants expected the ECB to reduce its key refinancing rate from 3% last week following Lafontaine’s resignation, just to prove that it had not heeded Bonn’s pressure.

But Wellink insists the minister’s remarks would not have influenced the ECB’s approach. “It would not be grown- up to postpone a decision simply because Mr Lafontaine said something,” he said. “There is a difference between Germany and the euro area. Germany is no longer the yardstick for monetary policy. For Europe as a whole, interest rates are low. Money is cheap.”

Moreover, he estimates that real short-term interest rates – adjusted to take account of expected inflation – are low at anything between 1.8% and 2.5%.

Wellink argues that continued economic gloom is not about interest rates, claiming that Germany has fallen behind several other EU member states in implementing reforms to labour, product and services markets.

In particular, he says, the country’s system for setting wage levels is outdated with too much uniformity.

An ECB economic model suggests a 2% real increase in wages in Germany would add at least 0.3% to euro-zone inflation in the first year. “If you combine that with additional wage claims in other countries, then you can see that the impact is hardly negligible for the ECB,” warned Wellink.